Thursday, 21 December 2017

It is tempting to
laugh at the rhetoric of Conservative politicians or journalists when
contemplating a possible future Labour government. As John Elledge
writes,
it isn’t long before
Stalin or Trotsky or Venezuela is mentioned. As he notes, this is not
a terribly clever tactic, particularly as many of the measures
proposed by Labour are (by design) pretty popular. As Stephen Bush
points
out, the problem for the Conservatives is not that ‘young people’
have not learnt about the evils of communist regimes, but that this
group are not impressed by Brexit or their wages and for many buying
a house is something their parents generation did.

Yet this kind of
hyperbole is not confined to politicians or journalists on the right.
When John McDonnell, Labour’s shadow Chancellor, said at their
party conference that they were ‘war-gaming’ for eventualities if
they gained office like a run on sterling, I thought this showed mild
paranoia. I was wrong. After I wrote
that sterling was far more likely to rise at the prospect of a Labour
government (standard macro: more fiscal, higher rates imply stronger
currency), Buttonwood of the Economist wrote
that there were at least five reasons why sterling might collapse,
most of which involve some form of capital flight.

Although Buttonwood
was careful to base analysis on measures that Labour proposed in
2017, I’m sure I was not imagining a subtext about what else could
hard left politicians do. You can read much the same from some on the
centre or soft left, who have learnt through experience to be wary of
the hard left. Nick Cohen knows better than to call Labour’s new
mass membership all militant entryists, but instead he says they are
innocent (but should know better) lambs flocking
towards wolves.

With language like this flying around, it is best to look for solid
ground. In parliament Labour is a centre left party led by the hard
left, to use popular labels. For that reason it would be impossible
for it to pursue a hard left programme, and the leadership knows that.
Contrast this with the current governing party: half soft, half hard
right, with the latter having the upper hand because of the
membership. The Conservative party’s ethos is such that the hard
right have imposed a ruinous policy on our country without challenge,
which actually did produce a collapse in sterling. Fortunately many
Labour MPs have less loyalty and perhaps stronger principles, and would not allow anything similar if they were in power. As a
result, I find pandering myths about Venezuela dishonest to be frank.
If you want to fret about deselection, I suggest you talk to Nadine
Dorries.

As far as City scare
stories are concerned, as I indicated earlier and Ben Chu confirms,
you will always be able to find those predicting doom. One of the
refreshing things about this Labour leadership is that they do not
cower defensively at such attacks, but come out fighting.
As Corbyn’s video could have added, it was City economists who told
us that austerity was necessary because otherwise there would be a
flight from UK government debt. They were horribly wrong then, as
interest rates on debt fell, and they are likely to be wrong again
with new stories about capital flight under Corbyn.

While talk of
Venezuela is ludicrous, there is a more interesting question about
where the influences on future Labour policy are coming from. To set
the scene, there was a recent prank outside the LSE designed
to suggest heterodox economists were the Luther to economic
mainstream Catholicism, and this was followed by a column
from Larry Elliott in the Guardian. Now there are plenty of things to
criticise about economics, but these are not them. As Frances Coppola
recounts,
the ‘economics reformation’ document is embarrassingly bad. If
you want to read a short but to the point and well written response,
see here.

So, in case you
thought otherwise, mainstream economists do not spend their time
attacking any form of market intervention, but instead try to design
efficient market intervention. As I have argued many times, most
mainstream macroeconomists did not endorse austerity, for the simple
reason that textbooks and state of the art models suggest it would be
a very bad idea. But there are some (not all) heterodox economists
who would like you to believe otherwise.

What has this got to
do with a future Labour government? Christine Berry presents a
comprehensive account
of who is shaping future Labour policy. It contains the following
paragraph.

“John McDonnell’s Council of Economic Advisors, set up during the
first days of the leadership, was a valiant effort to give the
party’s economic policy some heavyweight academic backing. But many
of its members were not natural Corbyn supporters, and ran
alarmed from the public ridicule heaped on the leadership in the
early days – resulting in the Council being largely disbanded.
Academic input now seems to be ad hoc rather than systematised.”

That is not how it
happened. It is true that some of us had to suffer some public
ridicule
when we joined, but that just reflected badly on those doing the
ridiculing. The breakup of the Council was inevitable after the EU
referendum. It is hard for any group of serious economists to
publicly advise in such a forum any political party that appears to support a Brexit
policy that is doing (see Chris Giles here)
so much damage and could do much more.

The understandable
wish of many heterodox economists to have an influence on Labour
policy does mean there is a potential competition for influence. Will
Labour policy be based on policies derived from mainstream analysis,
or those favoured by some heterodox economists? It would be wrong to
exaggerate this competition: most mainstream economists agree with
most heterodox economists about austerity, for example. But there are
some clear differences. (In some ways you see something similar on the right, where City economists compete with
mainstream economists for influence on Conservative party policy,
which is one reason Conservative macroeconomic policy can produce
major disasters.)

Ann Pettifor has an article
about why business would do well under Labour, which invokes some of
the points made in an earlier Financial Times piece.
Once you discount the scare stories, I agree with Ann that the
economy and therefore businesses will do much better under Labour
than under the Conservatives. But her article contains an interesting
remark which I think tells us something about the current leadership.
Ann’s says

“Here I must acknowledge a disagreement with Professor Simon
Wren-Lewis, of Oxford University, who advised Labour to adopt a
fiscal rule that once again prioritises monetary policy …”

Ann follows the heterodox MMT
school that favours using fiscal rather than monetary policy to
stabilise output and inflation. Of course both Ann and I were on
Labour’s Economic Advisory Council, and so it is obvious that there was a similar discussion in this group.

The fact that McDonnell chose a more conventional but still innovative approach (which
happened to be the one I put forward), and has also stressed the
importance of central bank independence, shows us two things: he has
a distinctly conservative streak, and he wants Labour not only to win
but to be successful in economic terms. But while McDonnell may have
opted for a mainstream approach on monetary and fiscal policy, there
is still plenty to play for in other areas. I am not suggesting that
mainstream economists should always win when conflicts occur, but it
is important for mainstream economists not to arrive late to these
battlefields, or worse still wait for politicians to read their
papers.

Tuesday, 19 December 2017

Jacob Rees-Mogg is
apparently the bookies favourite to succeed Theresa May. It is the
same Rees-Mogg who has declared the UK would become a vassal state if
we accepted a transition period under the terms on offer from the EU:
staying in the Customs Union & Single Market (CU&SM) and
accepting all the rules therein (the
full Acquis, to use the technical term). I think
the vassal state remark means he does not like the idea.

In one sense this is
all rather silly. As with the first stage agreement, the Brexiters
will march Theresa May up the hill only for May to march them back
down again as the reality of the UK’s position becomes clear. As
ever, the logic of Article 50 means that the EU can dictate terms.
The Brexiters probably understand this, but they have an eye on who
will replace May so they have to play the game: Johnson played
catch-up on the vassal state meme pretty quickly.

There is a deeper and much more serious concern about the transition phase. A much simpler and logical
alternative
to a transition period would be to extend Article 50 until
the outlines of any future trade arrangements were clear. It is the
Brexiters who will have none of this. The transition phase is itself
a creation of the Brexiters, and their fear that parliament or voters
will change their mind about leaving the EU. What this amounts to is another piece of deception, or perhaps self-deception. The UK is being forced to leave without being told anything about the final deal, including whether freedom of movement will be curtailed in any way.

It is a deception because the nature of the final deal is in reality already clear. I last wrote about the Brexit
negotiations in the days before a first stage agreement was
finalised, but I still wrote:

“Having signed up to staying in CU&SM as a default, the EU has
zero interest in concluding any other kind of agreement, particularly
as it will not safeguard the border. It will just be a matter of time
before the arrangement whereby we stay in the CU&SM is
formalised.”

I was a little
nervous about writing that, but I was relieved to see that other
economic realists reached similar conclusions. (Economic realists is a term due
to Alasdair Smith, to contrast to the magic realists in the government and elsewhere. See also
Jill Rutter.) This result, whereby we stay in the CU&SM,
apparently goes by the name of BINO: Brexit in name only.

I doubt the
government (by which I mean Davis and May) sees it this way, partly
because they still have faith that the cavalry, ridden by German car
exporters, will come to the rescue at some point, and the larger
economies in the EU will put Irish concerns over the border to one
side. But why should they? The best result for the EU is BINO, and
what the first stage agreement shows is they can get it, because at
the end of the day the UK will fold.

As Rick explains,
the Ireland border constraint may still allow some flexibility as far
as the single market for services (rather than goods) is concerned.
Of course there are good
economic reasons why we would want to stay in the single market for
services. The only point of trying to negotiate not to be from the UK
government’s point of view would be if that allowed some kind of
opt out from freedom of movement.

However, if there
has been one overriding mistake that even the economic realists have
made throughout this process, it is thinking too much about what the
UK’s options are and too little about what the EU will tolerate.
The moment it was clear that the Irish border question was a first
stage issue for the EU, talk of a Canada+ deal should have been
quietly forgotten. Equally the key question now is what tinkering
with the single market, if any, the EU will allow and whether
anything will buy flexibility on freedom of movement.

In an ideal world, I
would agree with Jean Pisani-Ferry who writes
that it should. Once the Eurozone was formed, the EU should have
thought more seriously about a two-speed EU or whatever you want to
call it. Besides the UK, both Sweden and Denmark do not wish to give
up an independent currency, and Norway, Iceland and Switzerland have
very close relationships with the EU. Unfortunately, however, I
suspect what will drive what the EU will tolerate with Brexit is the
need to remove any temptation for any member to exit. So rather than
thinking about what options the UK could go for, it makes more sense
to think of final arrangements that everyone in the EU can agree
leaves the UK at a disadvantage compared to being a member.

Would an arrangement which involved being partially in the single market and ignoring free movement be such a relationship? This must be questionable, because so many in the EU see free movement as integral to the single market. Although being out of the single market for services would be a big economic cost to the UK, so is restricting EU immigration. What matters are political costs, and such a deal looks too much like the UK gaining something significant by leaving.

In contrast BINO is a relationship the EU would be happy with, because following EU rules but having no say in those
rules would appear obviously worse to any politician than being a
member. It will certainly appear that way to any Brexiter. If
Rees-Mogg calls the UK under a BINO transition a vassal state, what
is he and others likely to think of a permanent agreement along these
lines? It would be the ultimate humiliation for Brexiters.

What can they do
about it? They could go for the nuclear option, and quickly trigger a
leadership contest. But this close to us leaving the EU, MPs may
persuade May to stay on (for the moment at least), and May might then
win a contest among Conservative MPs, and as a result
there would be no election involving the membership. A safer tactic
for Brexiters is to look towards a leadership contest after we have
actually left the EU i.e. during the transition period. [1] But the
road ahead is full of minor humiliations, like the end of the
‘nothing agreed until everything agreed’ myth.
Who knows what they will be provoked to do, or their backers and right wing press will provoke them to do.

If BINO is the final
destination, this should in an ideal world give Remainers a very
strong weapon. As David Allen Green suggests,
they can constantly ask what is the point of this Brexit? But we are
very far from an ideal world. Besides Remainers, the group that
should see most clearly that BINO is obviously inferior to remaining
in the EU are MPs, [2] but they are still bound by the will of the
people. What they should do is vote to extend Article 50 until the nature of the final deal is clear, but while this can still be portrayed as frustrating Brexit they will not. Not enough of the public will change their minds because
the government and the media, with the usual exceptions, will do all they can to obscure BINO as the ultimate destination, and the transition period will help the government to keep its magic realism going.

[1] I have
previously assumed that May would not be allowed to fight the next
election. But if the logic I describe above still holds in 2022, she
might yet. It will mean I underestimated
the Conservative zugzwang.

[2] Just as a single politically binding referendum was absurd because it allowed a vote to leave without knowing the destination, so giving MPs a final say on the deal before we leave in 2019 is pointless because the government will not make clear the nature of the final deal.

Saturday, 16 December 2017

This is based on
the UK experience, but I think some of this will also apply in the
US.

Why do right wing
politicians push an anti-immigration platform? The obvious answer is
that immigration is an important concern to their voters, and that is
certainly correct. However I think there is an additional factor,
which is illustrated by this interesting graphic from a recent
Financial Times piece
by Sebastian Payne.

Look at the right
hand panel, based I believe on British Election Study data.
This is the two dimensional way of representing political views I
have discussed before.
What we call the vertical axis can vary (culture, identity): I prefer
the labels ‘social conservatives’ and ‘social liberals’. *** Conservative voters tend to be right wing and socially conservative.
But Labour voters, while clearly left wing, include an important
segment that are also socially conservative. As a result, if right
wing politicians can make elections about issues that are important
to social conservatives (law and order, immigration, race and
abortion in the US) they have a chance of picking off Labour voters
that would otherwise vote for a left wing candidate.

Immigration is
particularly attractive to right wing politicians for a reason I
explored in a recent post.
There is a common misperception that immigration brings economic bads
like lower wages and reduced access to public services. Right wing
politicians therefore have a chance of persuading Labour voters to
substitute their economic concerns away from supporting a left wing
candidate into supporting an anti-immigration candidate on
economic grounds.

The standard story
perpetuated by the broadcast media in the UK is that heightened
concern among voters about immigration over the last decade is a
response to high numbers. However it was more than that. The Shifting
Ground study has an interesting chart shown below.

The blue line is the
importance that voters attach to the issue of immigration. The grey
line are the number of migrants coming into the UK. The black line
are the number of news stories about immigration in the print media.
(See here
for the source.) The standard story suggests the blue line
(importance) responds, in the first instance witha few years lag, to
the grey line (immigration numbers), with the black line (news
stories) reflecting people’s concerns with no lag at all. But it is
obvious that you can tell a very different story: people’s
perceptions about the importance of immigration reflect what they
read in the press.

This different
story, where the press leads opinion, makers much more sense. Why the
long lag between the increase in immigration in the late 90s and
public attitudes about the importance of immigration? As is well
known, public concern about immigration tends to be greatest in areas
where there are least migrants. In a poll
commissioned by the Sun newspaper in 2007 only 15% said that migrants
are causing problems in their own neighbourhood, while 69% said that
migrants were not having a strong local impact, either good or bad.There is a nice story Nick Clegg tells
on this:

“Years ago, before I became an MP, I was knocking on doors in
Chesterfield, Derbyshire – this was at the height of the
controversy about asylum seekers being dispersed around the country
when Tony Blair was in power. The tabloid newspapers were going nuts
about it every day. I remember speaking to a guy leaning on the fence
outside his house and saying: “Any chance you’ll vote for the
Liberal Democrats?” And he said: “No way.” And I said: “Why
not?” And he said: “Because of all these asylum seekers.” And I
knew for a fact that not a single asylum seeker had been dispersed to
Chesterfield. So I said to him: “Oh, have you seen these asylum
seekers in the supermarket or the GP’s surgery?” And he said
something to me that has remained with me ever since. He said: “No,
I haven’t seen any of them, but I know they’re everywhere.” You
can’t dismiss the fear, but how on earth are you supposed to
respond to that?”

The Shifting Ground report also looked, in 2004, at what best
explained whether voters thought high immigration was important as a
political issue. The best explanatory variables were readership of
the Mail, Express and Sun, in that order. All three were better
predictors of concern about immigration than whether people voted
Conservative, which reinforces the point that immigration is a way
for right wing politicians to gain votes from ‘natural’ Labour
voters.

If you think about it, the idea implicit in the standard story that
voters were observing greater immigration and as a result expressing
concern, which the print media simply expressed, is slightly
incredible. It seems unlikely during this period that voters were
looking at official data: voters anyway tend to grossly overestimate
the number of immigrants. A much more plausible story is that they
were reading their papers. It is important to stress that these
papers were not ‘brainwashing’ their readers, but instead playing
on eternal fears about outsiders, particularly if these outsiders are
seen as cheating the system.

Why would the print media start writing more stories about
immigration? You could say they are just reflecting the numbers,
again with a rather long lag. A more plausible explanation is
political. In 2001 William Hague talked
about Tony Blair wanting to turn the UK into a ‘foreign land’. In
his 2005 General Election campaign, Michael Howard put immigration at
the heart of the Conservative Party’s general election campaign.
Tim Bale discusses these and later political responses here.

The right wing tabloid press in particular covered immigration in a
way designed to generate hostility. As Ian Dunt noted
in 2013:

“new research from the Migration
Observatory at Oxford University shows just how pervasive and
systematic this hate campaign is. After studying 58,000 articles in
every national newspaper in Britain – over 43 million words –
researchers found the word most closely associated with 'immigrant'
was, you guessed it, 'illegal'. … For tabloids, other words closely
associated with 'immigrant' were 'coming', 'stop', 'influx', 'wave',
'housing' and 'sham'.”

A recent report
from the same source finds ‘mass’ as the most common way of
describing immigration. Claims made about immigration in the tabloids
are frequently untrue.
They are almost always negative, often extremely
negative. This is not a coincidence, or as a means of boosting sales:
it is a deliberate editorial policy.

In opposition the
Conservatives could do little more than ramp up the salience of the
issue among their base and among readers of right wing tabloids.
Labour on the whole triangulated
in public. Gordon Brown’s famous
remark after being challenged over the economic impact of immigration
in the 2010 election showed both how Labour viewed anti-immigration
arguments and also the problems with their triangulation. Once the
Conservatives gained power as part of the Coalition in 2010,
immigration as a major problem became official.

Furthermore,
arguments linking immigration to economic problems that had nothing
to do with immigration also became official, as the Conservatives
used immigration as a useful scapegoat both for falling real wages
and the impact of austerity on access to public services. This in
turn fed back into the print media as a whole: whereas in 2006 many
articles defending immigration could be found outside the right wing
tabloids, these diminished
in number by 2013.

If the right wing
tabloids created an anti-immigration atmosphere in parts of the UK,
after the Conservative’s ‘less than 100,000 target’ for net
immigration it became government policy. Yet, as I argued here,
it was - like the tabloids - a policy born in deceit. Every time
Theresa May tried to suggest significant economic measures to reduce
immigration, a combination of George Osborne and Vince Cable knocked
it down for the very good reason that it would damage the economy.
Her only choice was to create, literally, a hostile
environment for immigrants into the UK.

Although formally
the policy is only designed for illegal immigrants, it inevitably turns the anti-immigrant rhetoric of the tabloids into official
government policy. Landlords are reluctant
to let accomodation to EU immigrants in case their papers are not in
order. The same applies
to healthcare. I wrote
about the bureaucratic cruelty shown to foreign students, and
most academics will have similar stories from their own experience.
Colin Talbot describes
the experiences of EU academics after the Brexit vote. The simple
cruelty of this policy does not go unnoticed abroad (for example here
and here
from Heiner Flassbeck and well worth reading), and the contrast with
Germany’s policy towards refugees is stark. [1]

Brexit was the
apotheosis of this policy towards immigration. Although Remain gained
a few liberal Conservatives, they lost more left wing social
conservatives, as the left hand side of the first figure shows. The
right wing tabloids were of course not innocent bystanders
in this, but the key point is that they didn’t need to do anything
new except ramp up their anti-immigration stories and make sure they
always mentioned the EU. The key point of this post is that what
happened in the Brexit vote was simply what right wing politicians
and newspapers have been trying to do for nearly 20 years: use
immigration as a way of preventing socially conservative left wing
voters from going with Labour.

[1] Viewing from
abroad you might be forgiven for thinking the British were now an
insular, uncaring, rather bigoted nation. Yet when
a photograph of the body of a three-year-old refugee washed up on a
Turkish beach went viral, the Sun - always quick to see the limits to
how far it can distort news - launched an appeal and within two days
had raised £350,000 to help other refugees. It was a brief and
short-lived moment when natural compassion proved stronger than years
of conditioning.

*** Postscript (18/12/17) These are the same terms as John Curtice uses here

Thursday, 14 December 2017

Imagine the
following economy. Growth has been strong for a number of years: 2.7%
2014, 3.8% 2015, 3.1% 2016 and is expected
to be above 3% again in 2017. The OECD also think the output gap is
positive i.e. output is above the sustainable rate. Inflation was
bobbing around zero for a few years, but since 2016 has gradually
crept up to the target of 2%. It was just over 2% in the summer, but
dipped just below target in the last two months. Fiscal policy is
broadly neutral, and is expected to remain so. The unemployment rate
is still slightly above 6%, but the average rate since the crisis in
the early 1990s is over 7%.

We are talking about
the very healthy Swedish economy. An economy where inflation is at
target and some experts think the economy is running hot. What level
do you think the Riksbank, Sweden’s independent central bank, has
set its interest rate at? The answer is -0.5%. What is more the
general expectation (the Riksbank publishes its interest rate
forecast) is that rates will not start rising above -0.5% before
min-2018. In addition, the Riksbank is undertaking its form of QE.

What can explain
this dovish behaviour? Central banks are supposed to be inflation
averse, and elsewhere they talk about the need to ‘normalise’
rates the moment the economy starts recovering, so that they are
‘ahead of the curve’. Part of the answer lies in the past. I have
told the story in real time (here,
then here,
then here),
so just a short synopsis this time. The Riksbank started raising
interest rates from its then lower bound of 0.25% towards the end of
2010, because they were worried about a potential housing bubble.
Rates continued to rise to 2%, but inflation began to fall, and did
not stop until it hit zero at the end of 2012. There was no growth in
GDP in 2012. The eminent macroeconomist Lars Svensson resigned from
the Riksbank in protest at this departure from inflation targeting.

In 2012 the Riksbank
admitted their mistake, and started lowering rates to the new lower
bound of -0.5%, where they have been since the beginning of 2016.
Having made the error of prematurely raising rates once, they are in
no hurry to risk doing so again.

The Swedish
experience I think illustrates a number of points that could also be
applied to other central banks.

Macroprudential
policy is the way to deal with financial instability like housing
bubbles. Using the interest rate instead can be very costly.
Controlling inflation should be the only thing short term interest
rates are used for.

Low, below
target, inflation can be very sticky. Swedish interest rates went
below zero at the beginning of 2015, but inflation only went above
1% just under 2 years later, and this despite growth in GDP of 3.8%
in 2015.

Inflation
went above target in July, August and September of this year. But
the central bank, looking at the basic determinants of inflation
like wage growth relative to productivity growth, held their nerve
and kept rates at -0.5%. Inflation fell back to 1.7% in October, and
has stayed below 2% in November.

The argument
that interest rates must be raised above their floor so that central
banks are ‘ahead of the curve’ has not been as influential in
Sweden as it has been elsewhere.

It could still go
wrong for Sweden, but if it does not then the Riksbank's 2010/11 mistake may have a silver lining. By making the central bank
extremely dovish, they have allowed the Swedish economy to grow
strongly and unemployment to fall substantially. Perhaps the mantra
adopted by other central banks of needing to be ahead of the curve in
terms of early ‘normalisation’ is not such a clever idea.

Tuesday, 12 December 2017

Robert Skidelsky’s
recent piece
applies a textbook model to the question of immigration, which
implies real wages do fall for some time. The story goes like this.
There is sudden increase in labour supply because of a wave of
immigration. Immigrants compete for jobs, which forces down real
wages, encouraging firms to switch to more labour intensive forms of
production (automatic car wash to hand car wash), which reduces
labour productivity. However as firms respond to higher profitability
and invest, everything including real wages and productivity goes
back to where it was, the only difference being that the economy is
now larger. So immigration leads to lower real wages for as long as
it takes firms to invest.

Did the large
increase in EU immigration that started in 2004 have this effect?
There is no noticeable change in the rate of increase
in nominal or real aggregate wages until after September 2007, which
was when the Northern Rock crisis happened. Everything from 2008
onwards is dominated by the recession. But we have emerged from the
recession with an economy with low productivity and low real wages,
and as yet firms are not investing. Is this the model working, and
has the second stage involving more investment somehow stalled for
some reason? Do we need to cut immigration so we can have increasing
real wages again?

There are many
problems with this textbook model. First, there was a large increase
in work related immigration
from non-EU sources in the second half of the 1990s, but no
associated decline in real wage growth. Second, the model treats
immigration as an exogenous shock, by which I mean immigrants just
turn up and start competing for jobs. If that was the case, we would
expect to see a temporary increase in unemployment associated with
immigration inflows. You do not see that in the late 1990s, or
immediately after the start of EU migration in 2004. And third,
econometric evidence suggests
immigration has no noticeable impact on real wages (see also here. Results are similar in the US).

There is a simple
explanation for all these difficulties: we are using the wrong model.
An alternative model is one where firms find it advantageous to
produce in the UK, but have problems getting workers, a problem that
is solved by recruiting from overseas. It is very telling that under
Theresa May the Home Office commissioned
many studies designed to show how immigration was holding down real
wages, and all were suppressed because they could find no evidence.
In this production led model, there is no reason for real wages to
fall. The additional employment, investment and output go hand in
hand.

What about the
experience of low real wages after the Global Financial Crisis (GFC)?
The first point to make is that there is nothing about real wages
that a combination
of productivity growth, higher indirect taxes (in 2011) and exchange
rate depreciations cannot explain. We have not seen a significant
shift in the distribution of income towards profits. So any
immigration effect would have to come through via lower productivity.
As I explained here,
you can tell a story where poor UK productivity performance since the
GFC is the result of (a) a global productivity slowdown (b) poor UK
investment in R&D and new technology (c) unexpected negative
shocks: first the recession, then the lack of recovery (austerity)
and finally Brexit.

I would say at the
moment the evidence strongly suggests that real wages are not
noticeably reduced as a result of immigration, but I remain open to
seeing contrary evidence. We should also note the undisputed fact
that immigration provides more resources to the public sector, so
workers are better off via this route. But if this is the case, why
on earth do the public believe the opposite so strongly?

Perceptions

To many, in all
social classes, it is obvious that immigration reduces real wages.
The logic appears watertight. If more people with skill X come into
an area, that reduces what the existing workers with skill X can
charge. For the self-employed plumber, it means more competition for
a fixed number of plumbing jobs, so quotes for any job will have to
fall. For workers being paid a wage, it means they can be more easily
replaced if they or their union asks for a higher wages.

The same thing
happens in reverse when people point to Brexit leading to shortages
in labour in some sectors because immigrants are no longer coming.
Are, they say, that will raise wages in that sector, which is bound
to make the remaining workers in that sector better off.

Telling people that
econometric evidence suggests that there is no evidence that
immigration lowers real wages cuts little ice on its own, because the
logic above seems so clear. There is also no point in telling them
that immigrants will increase demand, because it is obvious that
immigrant plumbers will do their own plumbing, or immigrant workers
producing X will demand far less X than they produce.

The mistake people
are making is right at the beginning of this thought experiment. By
talking about real wages, people immediately think about themselves
as workers. As a result, they imagine a world where there are more
immigrants doing the kind of work they do. And, understandably, they
keep everything else constant. But immigration controls are never
about one group of workers, or the immigrants that have just
appeared in the neighbourhood. They are about workers across the
economy, influencing not just their nominal wage but the overall level of demand in the economy.

How do we get over
the failure to generalise? One way is to ask people to imagine the
opposite of most people’s implicit thought experiment. Ask what
would happen if there was more immigration in every trade except
their own. They should realise that immigrants would require the
services that this person provides, so the demand for their trade
would increase, allowing them to increase their quotes and raise
their standard of living.

Another mistake some
people make is to assume that because many EU immigrants are from
poorer East European countries, and immigration happens because of
differences in standards of living, we have to get some kind of
equalisation of living standards as a result of immigration. To see
why this is the wrong way of thinking about it, imagine if workers
were forced to move the other way, from rich to poor countries. Would
this raise real wages in poor countries? Of course not: they would be
paid the same as domestic workers producing the goods the poor
country does.

A far better way of
thinking about EU immigration is that it is allowing production in
the UK to happen which would otherwise go abroad. Of course there may
be a small number of cases where overseas workers are exploited
by restricting their ability to leave their employment, but domestic
laws and resources should exist to stop that happening.

One way proponents
of less immigration play on these misleading perceptions is to talk
about just controlling unskilled immigration. That is clever, because
it diverts people away from thinking in terms of a labour shortage
model. The best response to that is to suggest
various occupations
that are not classed as skilled, and ask people whether they really
want less care workers or nurses and so on.

But what if people
still feel that immigration must reduce wages in some way. Perhaps
just the possibility of potential immigration restrains workers for
asking for pay increases. The final mistake that people make so often
is to assume that lower nominal wages means lower real wages. For
that to happen prices have to be unresponsive to lower wages. And
that in turn would mean the share of profits in national income would
have steadily risen since we had large migrant inflows, which it has
not. The main determinate of real wage growth in the UK has and
always will be productivity growth.

Falling nominal wage
growth would still have an important effect, however. It would keep
inflation low, which would allow policymakers to let unemployment
fall relative to previous trends while keeping inflation on target
(it would allow the NAIRU to fall). And that has to be a good thing.

Implications

Although the
evidence overwhelmingly suggests that immigration does not reduce
real wages, it is fairly easy to see why people would think
otherwise. That contrast is ripe for exploitation. How it was
exploited, and how it is turned a previously outward looking,
tolerant nation into one that tries
to deport someone who have legally lived here for over 50 years, will
be the subject of a second post.

Saturday, 9 December 2017

Now for the hard
part, pronounced various media commentators after the first stage
Brexit deal had been signed. The chances of No Deal have diminished,
said others. It is strange watching the MSM sometimes. On political issues that involve expertise, like austerity and Brexit, it is generally an expert free zone. With Brexit you have to turn to the Financial
Times and Economist who understand what is really going on, or other knowledgeable bloggers like Chris Grey. [1]

It is not difficult
to discover how things really work in these strange
days. You just need to see what the important facts are, and continue
to apply them relentlessly despite what politicians say. The latest
important fact that tells you all you need to know is that a Single
Market and Customs Union needs a border to, as Martin Sandbu sets
out, not just collect tariffs but also check compliance with rules of
origin and standards. Therefore to avoid a border in Ireland, you
need Northern Ireland to comply with all the tariffs, standards and
regulations of the Single Market. The UK has now agreed, as I thought it would, that this must also apply to the UK as a whole.

This logic leads you
inevitably to the conclusion that, after Brexit, the UK will to the
first approximation [2] continue to obey all the rules of the Single
Market and Customs Union. So it will be as if we are still in the EU,
with the only difference being that we no longer have any say on what
those rules are. Fintan O’Toole quotes
Sherlock Holmes: eliminate the impossible and whatever remains,
however improbable, must be the solution.

But, you may
respond, all the UK have signed up to is that this is a default
position, if they fail to find a technological fix for the border, or
if they fail to conclude a trade agreement with the EU in stage 2,
and what does alignment mean anyway? Here you need a second fact:
there are no technological fixes
that remove the need for some form of hard border. We also know two
things from this first stage agreement: the UK desperately want a
trade agreement with the EU and the EU will not allow any agreement
that implies a hard border in Ireland. It therefore logically follows
that, to a first approximation, any trade agreement will have to
involve the UK staying in the Single Market and Customs Union.

Why then are the
Brexiters not up in arms? It is partly because the agreement plays on
their lack of realism, as I suggested
two days ago. The UK government and Brexiters still pretend that they
can, through some magical means, avoid a hard border. Given that
belief, how can they object to this fall back position? And that will
be the line that the UK takes from now into the indefinite future,
and because the broadcast media mainly talks to politicians rather
than experts that is the line the media will take as well, with some
honorable exceptions like those noted above. In may come apart as the
cabinet finally discusses
what the trade deal might look like, which is why the threat of No
Deal has not gone away. Or Brexiters like Gove may decide instead
that as May will not be making these trade agreements, it is
politically wiser to maintain unity and instead try to win the
ultimate prize from Conservative party members.

Why is it important
that this deceit continues? Because if everyone was honest, and
respected the reality of the border issue, people would rightly ask
whether our final destination (obeying the rules but with no say on
the rules) is worth having. They would note that being to all intents
and purposes part of the Customs Union means Mr. Fox cannot make new
trade agreements. People might start asking MPs why are we doing
this, and the line that we have to do this because the people voted
for it would sound increasingly dumb.

Unless something
amazing happens and the MSM do not allow this deceit to continue, we
will end up with the softest of soft Brexits. If that is where the UK
stays [3] there is a huge irony about all this. The Brexiters’
dream was to rid the UK of the shackles of the EU so it could become
great again, but it is a legacy of empire that has brought this dream
to an end. All the stuff about bringing back the glory of a once
great trading nation will not happen. Instead we will still be acting
under the rules of the EU, but because we are not part of it the UK
will be largely ignored on the world stage. A rather large country,
which nevertheless gets other countries (like Ireland!) to set its trade and
associated rules for it, and which it is therefore not worth
bothering with in the international arena. A Britain that can no longer pretend to be a world power, not as a result of the actions of some left wing government, but because of the delusions of Brexiters.

[1] To be fair to
the broadcast media (as I always am), yesterday I did see interviews
with ministers which raised the issue of what the implications of the border
agreement are. But for whatever reason these interviewers allowed those ministers to bat away the question with waffle, and I
strongly suspect the point will be forgotten in the days ahead.

[2] What do I mean
by first approximation? For a start, we will not be part of the
Customs Union and Single Market, but instead be part of bespoke
versions of both. That may allow wiggle room, which in turn might
just possibly allow something that could be called a deal on free
movement, although this will probably just mean Free Movement to a
first approximation. So a bit like Norway or Switzerland, but with
rather less room for maneuver than those countries because both have
borders with the EU. For more details see here.

[3] It will not be
where it stays. First, there is the question of who May’s successor
will be, and what they will do. If a soft Brexit goes ahead, the
Brexiters will choose the right time (for them) to cry betrayal. It
will only be a matter of time before they make a new attack, arguing
that the UK should strike out for true independence. As I argue here,
bigger things than just one failure have to happen before the UK rids
itself of this particularly British form of plutocracy.

Thursday, 7 December 2017

Should I be shocked
that no quantitative Brexit impact assessments were commissioned by
David Davis? Is it surprising that there has been no cabinet
discussion of the final trade deal? Not if you accept the parallel I
draw here
between Brexit and Trump. Brexit is an expression of ideology or
feeling, an act of faith. An impact assessment is therefore beside
the point, and just dangerous to the project. I think you only get
outraged by this if you haven’t really accepted what the true
nature of Brexit is, and how it came to pass. By this I do not mean
why people voted for Brexit, but why a large section of the UK press
and Conservative party made it their primary political project. The
true nature of Brexit means that the normal rules of politics do not
apply, and could not apply.

I was surprised
about Ireland. I did not realise until September
[1] what it would require from Theresa May. Back in March as Article
50 was triggered I thought
that would inevitably mean an open ended transition period (despite
lots of talk about 2 years), and so the final destination of Brexit
would not be decided until after the next election. If the
Conservatives lost that, Corbyn would satisfy himself that the EU
would not hinder his economic programme, and we would end up staying
in the Customs Union and Single Market (CU&SM). [2]

But will the
question of the Irish border change that? Those that constructed the
Article 50 process understood that any country leaving the EU would
be desperate for a deal, which is why there is a two stage process.
The two stage structure maximises the chance that the EU will get the
deal they want on the first stage issues. In terms of citizen’s
rights and the leaving bill that has proved correct.

What the EU realised
long before the UK was that Brexit involved a unique problem. The
UK’s only land border with the remaining EU could not be allowed to
become a hard border without putting the Good Friday agreement at
serious risk. Yet the EU requires a hard border, and the WTO would
insist that the UK recognised that (again Brexiter talk of not
building one is just nonsense). Ireland’s most important priority
was that there should be no hard border, and as a result the rest of the EU
agreed to make that part of the first stage.

Once again, this
shows you the nature of the Brexit project. Any Brexiter interested
in reality would have realised that Brexit put the Good Friday
agreement at serious risk, any would have at least thought about the
problem. But Brexit is not a reality based project, and so they did
not. We should be thankful that the Irish government made this a
priority.

In simple terms
there are therefore only two possibilities
for Brexit that avoid a hard border. Either the UK stays in the
Customs Union and Single Market (CU&SM), or just Northern Ireland
does and there is a sea border between two parts of the UK. (What 'alignment' means is what the EU chooses it to mean.) The UK
government still wants to pretend that other possibilities exist:
something technological or that the stage 2 agreement they come to
will not require a hard border. But the Irish government quite
rightly insists that if neither of those two happen, the UK
government recognise that at least part of the UK will stay in the
CU&SM. That in the agreement the UK almost signed a few days ago.

It was scuppered
because the DUP quite rightly wanted to know which of these two
arrangements the UK government had in mind. Above all else, the DUP
do not want a sea border between Northern Ireland and the rest of the
UK, because they see that as making unification much more likely. I
suspect the fact that whatever May said in her last minute phone call
was not enough to satisfy the DUP means they will be prepared to
bring down the government unless they get some sort of public
guarantee that there will be no sea border.

In which case, May
will finally have to call the Brexiters' bluff. Maybe she can convince
them to keep faith in their rhetoric that there is a technological
fix (there isn’t)
or there will be a final trade agreement that deals with the problem
(there won’t be) and let her commit to no sea border in the
eventuality that neither happen. If she cannot, their only other
option is the nuclear one of trying to force May out. As the latest
poll I have seen suggests the Conservative party membership’s
favoured candidate is Someone Else, that looks like a risky move. But
if they take that risk, Ireland will indeed have made a difference.

But if they do not,
and May does sign up to stage 2 on the basis of UK membership of
CU&SM as the fallback position, does that change anything? You
would think it should, but because it is the fallback position the UK
government will start negotiations over a transition arrangement and
a final trade agreement. After we officially leave May will then
resign and the Conservatives will set about the task of trying to win
the next election. Trade negotiations with the EU will be put on the
back burner. We end up at in exactly the same place as I expected we
would be back in March.

The only difference
is that it will be blindingly obvious that this is all for show.
Having signed up to staying in CU&SM as a default, the EU has
zero interest in concluding any other kind of agreement, particularly
as it will not safeguard the border. It will just be a matter of time
before the arrangement whereby we stay in the CU&SM is
formalised. But will any British politician that matters have the
courage to tell the British people the truth?

The truth is that
all their vote has achieved is that they will now have no say in the
rules the UK has to follow. Instead whoever wins the next election
will come back with some ‘deal’ over freedom of movement which
few still care about because no one is coming to the failing UK
economy. And of course the Brexiters will cry betrayal because we
are, as far as they are concerned, still in the EU, and we will be
back to where we were before the referendum, except with no say in
the rules we have to obey.

I would really like
to think that this can be avoided. Perhaps before we formally leave
the EU, enough Conservative MPs (and despite all the noise from some
Remainers about Corbyn, it is Conservative MPs who matter) will put
country before party and call for a second referendum. Ireland
increases that possibility, but from the evidence so far I do not see
it happening.

[1] As someone told
me, being ahead of the UK MSM on this is a very low bar.

[2] For all those
who insist that the Labour leadership wants to leave, you have to
realise two things. First, by the time Corbyn takes over we will have
left, and he has no interest in pursuing the sunny uplands of trade
deals with countries like the US. Second, there is nothing in the CU&SM that really hinders his immediate economic programme. So why leave the
CU&SM just after he gets elected? It would profoundly alienate
those who voted for him and damage the economy on his watch.